SocGen plans $8 billion rights issue at sharp discount

Profit still tops French bank's previous forecast

By

SimonKennedy

LONDON (MarketWatch) -- Societe Generale, the French bank rocked by over $7 billion of losses from unauthorized trading, set out plans Monday for a rights issue at a steep 39% discount.

SocGen (013080), which had previously said that it would need to raise 5.5 billion euros ($8 billion) in fresh capital following the scandal involving trader Jerome Kerviel, said it would raise the cash through a one-for-four rights issue at 47.50 euros a share.

The 39% discount to Friday's close was greater than the 30% discount that major investors had reportedly been demanding and helped push shares in the bank down 4.8% in afternoon Paris trading at 74.01 euros.

Frederic Oudea, SocGen's chief financial officer, told a press conference that the size of the discount wasn't significant because existing shareholders would not see their overall stake reduced if they chose to take up the rights issue. If shareholders don't want to take part, they can also sell their subscription rights, he said.

But analysts said the depth of the discount still sent the wrong message.

"Even if this discount has no impact for shareholders participating in the capital increase or selling their subscription rights, we believe the psychological signal is not positive as this discount is higher than the 20% to 30% range expected," said Deutsche Bank analyst Brice Vandamme in a note to clients.

The bank also provided more details on its write-downs, saying they totaled 2.6 billion euros for the year. The charges included 1.25 billion euros on its portfolio of non-hedged collateralized debt obligations and 947 million euros on counterparty risk with bond insurers.

There was also a 325 million euro write-down on its trading portfolio of residential mortgage-backed securities, which the bank said had been included in write-downs in previous quarters, but hadn't been specifically allocated to the RMBS portfolio.

On the positive side, SocGen said it would still make a net profit of 947 million euros for 2007. The result is down 82% from a year ago, but ahead of the 600 million euros to 800 million euros it had previously forecast.

Still, the dilution effect of the planned new shares caused analysts at Bear Stearns to sharply cut their earnings forecasts. The broker lowered its 2008 earnings per share estimate to 7.81 euros from 9.34 euros and its 2009 estimate to 8.30 euros from 9.89 euros.

Societe Generale said the subscription period for the new shares will run from Feb. 21 to Feb. 29. J.P. Morgan, Morgan Stanley and SocGen's investment banking arm are lead managers on the issue with Merrill Lynch and Credit Suisse acting as co-bookrunners.

Scaling back risk

Looking past the current scandal, SocGen said it wants to "rebalance its business portfolio," through organic growth and targeted acquisitions.

"The first half of 2008 is expected to be a transitional period, to draw lessons from the recent events and strengthen our control procedures and anti-fraud measures in a market environment that will probably remain difficult," the bank said in a statement.

The bank added it will reduce risk and trading volumes in its arbitrage activities, which was the trading arm Kerviel was involved in.

The trader allegedly placed large bets on a rally in European markets early this year and hid his positions by creating fake trades in the opposite direction.

Over the weekend a second trader, reportedly an employee at SocGen subsidiary Fimat named Moussa Bakir, was released after being quizzed for two days by police. A report in France's Le Monde Newspaper said Friday the Fimat trader may have been aware of Kerviel's unauthorized trading. See full story

Security stepped up

Jean-Pierre Mustier, the head of corporate and investment banking at SocGen also detailed some of the steps the bank has taken to beef up its security.

Mustier told a press conference that SocGen now requires passwords to be changed far more frequently and has implemented biometric controls -- such as fingerprint or retina scans -- to limit access to its most sensitive systems.

The bank is also taking a stricter line on ensuring traders take vacations, as this means they have to hand over their positions to another employee, making any fraud or unauthorized trading more likely to be discovered.

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